ITAT Rules: Depreciation on Genuine Fixed Assets Cannot Be Denied for Source Deficiency
Tribunal Says Asset Authenticity Matters More Than Funding Source
Judgment Reinforces Taxpayer Rights and Limits Arbitrary Disallowances
By Our Legal Reporter
New Delhi: December 21, 2025:
In a landmark decision, the Income Tax Appellate Tribunal (ITAT) has held that depreciation on genuine fixed assets cannot be disallowed merely because of alleged deficiencies in the source of funds used for their purchase. The ruling provides clarity on how depreciation claims should be treated under the Income Tax Act, 1961, and ensures that taxpayers are not unfairly penalised for issues unrelated to the authenticity of the assets themselves.
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Background of the Case
- The case arose when tax authorities disallowed depreciation claimed by a company on its fixed assets, citing deficiencies in the source of funds used for acquisition.
- The company argued that the assets were genuine, used for business purposes, and duly recorded in its books of accounts.
- The ITAT agreed with the taxpayer, ruling that once the existence and genuineness of assets are established, depreciation cannot be denied merely on grounds of funding source disputes.
Key Highlights of the Judgment
- Depreciation is linked to asset use, not funding source: The tribunal clarified that depreciation is allowable if the asset is genuine and used for business, regardless of how it was financed.
- Taxpayer protection: Arbitrary disallowances based on alleged source deficiencies undermine the purpose of depreciation provisions.
- Legal precedent: The ruling aligns with earlier judgments where courts emphasized that depreciation is a statutory right under the Income Tax Act.
- Documentation matters: Proper records, invoices, and proof of asset use remain essential for claiming depreciation.
Impact of the Ruling
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- For taxpayers: Provides relief and certainty in claiming depreciation, especially for businesses facing scrutiny over funding sources.
- For tax authorities: Limits their ability to disallow depreciation arbitrarily, ensuring focus remains on asset genuineness and business use.
- For businesses: Encourages investment in fixed assets without fear of unjust disallowances.
Expert Opinions
- Tax professionals welcomed the ruling, noting that it strengthens the principle that depreciation is a statutory allowance, not a discretionary benefit.
- Legal experts highlighted that the judgment reinforces judicial consistency, preventing misuse of tax provisions by authorities.
- Industry analysts believe the ruling will boost confidence among businesses, particularly in sectors with heavy capital investments.
Timeline of Developments
- 2014–2020: Several cases reported where depreciation was disallowed due to disputes over funding sources.
- 2025: ITAT ruling clarifies that depreciation cannot be denied if assets are genuine and used for business.
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Wider Implications
This ruling has broader implications for India’s tax system:
- Encourages compliance: Taxpayers are motivated to maintain proper records of assets.
- Boosts investment: Businesses can invest in fixed assets without fear of arbitrary disallowances.
- Strengthens judicial clarity: Reinforces the principle that depreciation is tied to asset authenticity, not financing.
Conclusion
The ITAT’s ruling that depreciation on genuine fixed assets cannot be disallowed merely for alleged source deficiency is a major victory for taxpayers. It ensures that businesses are not unfairly penalised for issues unrelated to asset authenticity and reinforces the statutory nature of depreciation under the Income Tax Act. This judgment will likely serve as a guiding precedent for future disputes, strengthening fairness and consistency in India’s tax regime.
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